I’m the Washington D.C. bureau chief for Forbes and have worked in the bureau for more than two decades. I've spent much of that time reporting about taxes -- tax policy, tax planning, tax shelters and tax evasion. These days, I also edit the personal finance coverage in Forbes magazine and coordinate outside tax, retirement and personal finance contributors to Forbes.com. You can email me at jnovack@forbes.com and follow me on Twitter @janetnovack.

Should the Internal Revenue Service regulate Elmer Kilian, a retired Korean War Vet who hangs an “Eagle Tax Services” sign on his home in Eagle, Wisc. every tax season and prepares 80 to 100 income tax returns on his dining room table? It never did. Then, in 2010, after years of listening to complaints about the problems created by incompetent and dishonest unlicensed tax pros, the IRS decided to require all paid preparers to register with it and those who weren’t otherwise subject to national standards to pass a minimum competency test. Registration began in 2011 and preparers were supposed to pass the test by the end of this year.

But on Friday, in a surprise ruling, Washington D.C. Federal District Court Judge James E. Boasberg blocked the IRS from implementing the new requirements, finding the agency “unambiguously” lacked authority from Congress to regulate those who simply prepare returns and don’t otherwise “practice” before the IRS by, for example, representing a taxpayer in an audit. Boasberg’s ruling came in a suit brought by the libertarian Institute for Justice on behalf of Kilian; Sabina Loving, a bookkeeper who prepares 100 returns a year on the South Side of Chicago; and John Gambino, a Hoboken, N.J. Certified Financial Planner who does about 50 tax returns for pay a year.

Boasberg said in his decision that he would issue a permanent injunction blocking the IRS registration scheme. Noting that Killian and Gambino had said they would likely shut down their tax businesses if forced to comply with the new requirements, the judge found that they would suffer irreparable injury without such an injunction. (The decision and briefs in the case have been posted here by IJ.)

It was unclear Friday night what impact Boasberg’s ruling might have on the current tax filing season, which officially opens January 30, eight days later than originally scheduled, thanks to Congress’ last minute fiscal cliff tax deal. IRS spokesman Dean Patterson said the agency had “no immediate comment’’ on the ruling. The government could ask Boasberg to stay his injunction and can appeal his decision to the U.S. Court of Appeals for the District of Columbia Circuit.

Under the new IRS rules, the previously unregulated preparers were also required to complete 15 hours a year of continuing education beginning in 2012. The IJ argued that the cost of just those 15 hours of credits, if obtained from IRS’s online forums, would range from $675 to $1,012 a year, burdening small tax preparation businesses. But that cost apparently wouldn’t have stopped any preparers from working this tax season since on Jan. 3, the IRS updated its continuing education FAQs to allow any preparers who hadn’t completed their hours in 2012 to simply make them up in 2013.

The new registration and testing requirements were supported by H & R Block, the nation’s largest tax preparation chain with 11,000 offices open during tax season, and by Jackson Hewitt Tax Service, the second largest, with 6,800 locations, including 2,800 in Wal-Mart stores and 400 in Sears stores. The Institute of Justice argued, in its suit, that the two firms supported the regulations “because they imposed compliance costs that their smaller competitors will have more difficulty absorbing” and created a barrier to entry in the tax prep business. CPAs, lawyers and EAs also backed the new requirements.

In a statement Friday. IJ Senior Attorney Scott Bullock accused the IRS of trying to “set itself up as king” and IJ Attorney Dan Alban hailed the decision as a victory for “hundreds of thousands of tax preparers across the country and the tens of millions of taxpayers who rely on them.” About 60% of tax filers pay a pro, while the most of the rest use Intuit’s Turbotax or a similar program to prepare their returns.

Claudia Hill, a Cupertino, Cal.-based EA who contributes to Forbes and lectures widely to other tax pros, described the decision as a loss for taxpayers who “again find themselves in the situation where their local barber or massage parlor technician face more consumer protection regulations than their tax return preparer.” Only Oregon, California, New York and Maryland have state laws regulating all preparers, she noted.

National Taxpayer Advocate Nina Olson began arguing back in 2002 that “untrained and unscrupulous preparers” presented a big problem for ordinary taxpayers and pressed the IRS to regulate all paid preparers. She did not respond Friday night to a request for comment on the decision.

Follow Janet Novack on Twitter or click the Forbes Follow button at the top of this page.

Post Your Comment

Post Your Reply

Forbes writers have the ability to call out member comments they find particularly interesting. Called-out comments are highlighted across the Forbes network. You'll be notified if your comment is called out.

I am glad the judge shot this down. I am a small, self-employed, company that has been preparing returns for just over 30 years. I, as well, provide a personal and comfortable attmosphere of my kitchen table. My 50 +/- clients love the personal attention. The $63.00 IRS license is not a problem for me. But the additional costs of education and testing is a major problem for me. Add in the special software each year, 2 cases of paper, and 6-8 xl ink cartridges and it equals about $3000.00. Here it is the end of March and I have not broken even yet!! I have been seriously considering not doing it any more due to the losses. But I am conserned for my clients who are mostly low income, not being able to afford the costs of the big companies and cpa’s. We, myself and my clients, are suffering over the regulations put forth by the IRS.

Thank you Janet for the news. I appreciate your time and reply. I know that the rules the IRS put forth in 2010, concerning paid preparers, were made to drive out the small business person. There are very few “mom and pop” businesses left now a days due to big business take overs and the economy. Three cheers to the judge who put the brakes on the IRS from driving small businesses out of business. :)